When interest rates are low, it’s a good time to refinance your mortgage loan. The process is similar to obtaining your original mortgage, so expect it to take from four to six weeks. There are ways to move the process along so you are paying your lower rate sooner. That means before contacting a lender, there are certain steps you should take.
Know the Pre-Refinancing Steps
Make sure you’ve got a good credit score before going loan shopping. The better your credit score, the lower the interest rate for which you’ll qualify. You can obtain a free credit report from each major credit bureau annually, so take advantage. These three bureaus are Experian, TransUnion and Equifax. If you see any errors on your credit report, notify the bureau immediately. You want these errors rectified before seeking a mortgage refinance loan. During this time, don’t open up any new lines of credit, such as standard credit or store charge cards.
It’s also critical to decide exactly why you want to refinance. Sure, you want to save money, but are you refinancing primarily to get a lower rate or to pay off your mortgage faster? How long do you intend to stay in your house? It may not make sense to refinance if you think you will move within the next few years, as any savings are likely eaten up by refinancing costs. Do the math and set a target rate that makes sense for you financially. That means estimating how many years you may stay in the house, then dividing the closing costs by your annual savings. This will help you calculate how many years it will take you to break even at a specific rate, according to Experian. As long as you plan to stay in the house past the break-even date, it makes sense to pursue refinancing.
Finding a Lender
Which bank is best for refinancing? Although your instinct is to go with your current lender, it makes sense to shop around to obtain the best deal. Besides banks, you can seek refinancing from a credit union or mortgage broker. All of the essentials, such as interest rates, fees and closing costs, will vary according to the lender, so it’s wise to have several quotes before making your decision. You must also factor in the various fees and see if it still makes sense to refinance after paying these costs.
Keep in mind that if you just bought your home, you may find it difficult to refinance the mortgage. Your current lender will probably not refinance a mortgage that is less than six months old, so you will have to look for another lender in this situation.
Types of Mortgage Refinancing
Mortgage refinancing falls into two primary categories. If you go the cash out refinance route, you borrow against the equity in your house, then take out a new mortgage for more than you owe. You can use the extra funds to pay off your high-interest credit card debt or for any other purpose. However, most homeowners chose the rate and term finance route, which refinances the balance of their current mortgage at either a lower interest rate or a shorter period. With the latter, you might change your loan from a conventional 30-year mortgage to a 15-year term. With a shorter term, you pay off your mortgage more quickly while building more equity in the property.
Discuss with the lender whether a fixed rate or adjustable rate makes more sense for you. With the former, you will pay the same amount over the life of the loan. With the latter, the rate may move up or down, so you could potentially save a great deal of money, but also end up paying more. As with any contract, reading the fine print is essential. Don’t just look at how much you will save each month and your lower interest rate. Take all of the fees into account before signing the contract. If you have questions, make sure the lender answers them to your satisfaction before you agree to the terms of the loan. Remember, there is no such thing as a stupid question, and that “stupid question” could end up saving you a lot of money.
Mortgage Refinance Timeline
Once you’ve decided on a lender offering the best rate and terms for your refinance via their loan estimator, you must fill out the application. Expect to provide income and employment verification, along with tax returns, homeowner’s insurance and other documentation. If you are an employee, the process is generally faster as you can provide the lender with your W2s and other payment information. If you are self-employed, the lender is likely to take longer to examine your financial situation. One way you can speed up the mortgage refinance timeline is by responding quickly to any requests for documentation by the lender.
FHA Streamline Refinance
If you have an FHA loan and want to refinance, the process is a little different. The FHA offers a streamline refinance program for borrowers as long as their current mortgage is an FHA loan. As the U.S. Department of Housing and Urban Development, which oversees the FHA loan program, states, "streamline refinance" refers only to the amount of documentation and underwriting that the lender must perform and does not mean there aren't any costs involved in the transaction. Eligible borrowers cannot have a delinquency on their mortgage, meaning they have not made timely payments and currently owe money. The refinance must result in a “net tangible benefit” for the borrower, but it makes no sense to refinance if that is not the case.
With a streamline refinance, there is no real cash-out refinance option, as the limit of cash a borrower may take out on a current mortgage is just $500. One benefit of the streamline refinance program is that very little documentation is required. The FHA does offer cash-out refinancing, but not under the streamline program. If the borrower wants to go that route, expect to provide substantial documentation to the lender.
Under FHA regulations, lenders aren’t allowed to include closing costs on the new, streamline refinance mortgage. However, when an FHA lender offers a “no closing costs” refinance, they are actually charging more interest on the loan than the borrower would pay in actual closing costs.
Home Appraisal for Refinancing
Just as you had the home appraised prior to obtaining your mortgage, you must have another appraisal done before obtaining refinancing. Before the appraisal, make any necessary repairs and give it a good clean, as well as a fresh coat paint if needed. You want the house to look as good as possible because that may affect the appraisal amount. The appraiser will establish the home’s current value based on square footage, condition, location and recent comparables – or “comps” – reflecting recent sales of similar properties. Your lender wants to ensure you have enough equity in the house to support refinancing. Although home values generally rise, the Great Recession proved that property values can also decline.
The Refinance Closing
As with a conventional mortgage, a refinancing requires a closing. Figure your closing fees to equal between 3 and 6 percent of your new mortgage amount. You’ll pay for a loan origination fee, underwriting fee, credit report fee, home appraisal, title insurance and other possible fees, such as discount points. Your lender will provide you with the list of fees prior to the closing, so contact your lender if you have questions about the fees or amounts charged.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.